CB Financial Services, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 14, 2016. The company is a Pennsylvania bank holding company operating Community Bank and insurance subsidiary Exchange Underwriters in southwestern Pennsylvania. Results versus 2014 are affected by the October 2014 FedFirst acquisition, so year-over-year comparisons are not fully like-for-like.
Financial results and position
- Profitability: Net income was $8.42 million, up 96.2% from $4.29 million; diluted EPS was $2.07 versus $1.63. Return on average assets was 1.01%, and return on average equity was 9.89%.
- Revenue and margins: Net interest income rose 54.7% to $29.20 million. Net interest margin increased to 3.82% from 3.47%. Noninterest income nearly doubled to $7.60 million, including $3.54 million in insurance commissions. Noninterest expense rose 36.5% to $22.93 million; the efficiency ratio improved to 62.31% from 74.00%.
- Credit costs: The loan-loss provision was $2.01 million, versus none in 2014. Net charge-offs increased to $710,000 from $187,000.
- Balance sheet: Total assets were $830.7 million, down 1.8%; net loans were $676.9 million, down 0.5%; deposits were $679.3 million, down 2.6%. Shareholders’ equity increased 6.1% to $86.9 million.
- Credit quality: Nonperforming assets rose to $11.0 million from $7.3 million, and nonperforming loans were 1.56% of loans versus 1.03%. The allowance was $6.49 million, or 0.95% of loans; coverage of nonperforming loans declined to 60.69% from 73.92%.
- Funding and liquidity: Year-end borrowings totaled $60.4 million: $32.4 million short-term and $28.0 million in longer-term FHLB advances. Cash and due from banks was $11.3 million; unpledged securities were $24.2 million. The company reported $301.4 million of FHLB borrowing capacity, with $37.4 million outstanding and $18.3 million used for a standby letter of credit. Other stated facilities—$76.5 million at the Federal Reserve and $40.0 million with banks—had no outstanding balances.
- Cash flow: Operating cash flow was $51.6 million, compared with cash used of $2.4 million in 2014; investing activities used $28.9 million and financing activities used $23.0 million. The filing’s cash-flow statement includes $58.6 million of mortgage-sale proceeds and a $3.1 million increase in taxes payable.
- Capital and shareholder returns: Community Bank was categorized as well-capitalized. Its common equity Tier 1 ratio was 12.83%, total risk-based capital ratio 13.89%, and leverage ratio 9.60%. The company declared $0.85 per share in dividends for 2015.
Material changes and quarterly results
- Income growth reflected a full year of FedFirst operations and the addition of Exchange Underwriters; insurance commissions increased by $3.1 million. Average loans increased by $238.1 million, primarily due to the merger.
- Commercial real estate loans increased $20.2 million and consumer loans increased $26.5 million, mainly from indirect auto lending. Residential loan sales and paydowns contributed to a $50.1 million decline in mortgage loans; $38.2 million of acquired residential mortgages were sold.
- Deposits declined $18.2 million, including lower money-market balances and school-district and oil-and-gas-related deposits. Reciprocal-network deposits increased $12.8 million.
- Attributable to two large commercial real estate properties, nonperforming assets increased $3.7 million. Management also cited local economic conditions and borrower-specific circumstances.
- Fourth-quarter 2015 net income was $1.76 million, compared with $2.13 million in the third quarter. Fourth-quarter loan-loss provision was $1.03 million, versus $300,000 in each of the first and third quarters.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management’s strategy is to grow commercial lending, maintain conservative underwriting, expand core deposits and develop insurance income. Management expected return on equity to remain relatively low until it could leverage capital raised in the merger.
- Major risks include commercial real estate and other credit exposure, local real-estate conditions, interest-rate and margin sensitivity, deposit competition and retention, and economic weakness affecting customers tied to Marcellus Shale natural-gas activity. Management warns that further credit deterioration could require additional provisions.
- The company also identifies the Pennsylvania budget impasse as a risk to municipal borrowers, municipal securities and deposits. Emergency funding was distributed in January 2016, but management warned that a continuing impasse could affect liquidity and earnings.
- Interest-rate modeling estimated a 17.9% decline in economic value of equity under an instantaneous +300 basis-point shock; the filing cautions that model assumptions limit the estimate’s predictive value.
- Unusual or notable items include $565,000 of insurance contingency fees, the $2.01 million 2015 loan-loss provision, and a prior-year $840,000 pretax gain on sale of real estate owned. No goodwill impairment or other-than-temporary securities impairment was recorded in 2015.
- A shareholder lawsuit challenging the FedFirst merger was dismissed and the dismissal affirmed; the petition for further review was denied in February 2016, closing the case. Management reported no other material pending proceedings.
Investor facts to verify
- Whether the rise in nonperforming assets and commercial real estate problem loans continued after year-end, and how the allowance compares with identified risks.
- The extent of ongoing exposure to natural-gas-related borrowers and Pennsylvania municipalities, including school-district deposits and securities.
- How much 2015 earnings growth and insurance income are recurring, including the sustainability of contingency commissions and costs following the merger.
- Whether deposit levels, funding costs, and the maturity of $65.0 million in certificates of deposit due within one year affect liquidity or margins.
- How 2015 operating cash flow was affected by mortgage-sale activity, tax-payable movements and other working-capital items, and whether that cash generation is repeatable.